I did not take any salary or wages from my S-Corp

[Haroon]

2021 was the first year of my S-Corp.  I am a solo shareholder, and I did not pay myself any salaries or wages.  Company made 187k in income, and I did take 90k out of the business.  After extending the duo that, now I am doing the taxes for the business.  Question: how do I report the 90k that I took out on form 1120s?

please help...

[tagteam · Accepted solution]

Line 1 of your K-1 will show your ordinary business income that you will report on your 1040 (you are liable for income tax on your share of the corporation's income regardless of whether or not it was distributed).

The $90k you took out is merely a distribution. 

[tagteam]

You might also want to seek guidance from a local tax professional since you did not take a salary.

See https://taxexperts.naea.org/listing/service/corporations

@Rick19744 

[Opus 17]

You are required to pay yourself a salary at a reasonable wage for your services to the S-corp before you can take any distributions.  Salaries are subject to social security and medicare withholding, and it is improper and illegal to avoid those taxes by calling what you take out a distribution.  (It is acceptable to take your salary in a lump sum, such as quarterly or even annually, if you are waiting to see how the business does, but you must take a salary.)

If there are additional profits after paying yourself a reasonable salary, you can take that as a distribution.

A reasonable salary is what you would pay an employee to perform the same tasks and participate in the business that you did.  For example, if you are running a fast food restaurant and would have to offer $70K to hire a manager off the street, then you must take a $70K salary, and you can take the other $20K as a distribution.

You really should see an accountant.  Although it's running late.  The penalties for not taking a salary and paying employment taxes can be severe.  It's a special IRS enforcement focus. 

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-a...

[tagteam]

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@Opus 17 wrote:

If there are additional profits after paying yourself a reasonable salary, you can take that as a distribution.

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An S corporation shareholder can take a distribution at any time, regardless of whether or not a salary is paid.

A sole shareholder, such as @Haroon, is taxed on the net profit of the corporation (aka ordinary business income on Line 1 of Schedule K-1 (1120-S). Any salary taken by the shareholder serves to reduce that net profit. 

[Opus 17]

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@tagteam wrote:

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@Opus 17 wrote:

If there are additional profits after paying yourself a reasonable salary, you can take that as a distribution.

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An S corporation shareholder can take a distribution at any time, regardless of whether or not a salary is paid.

A sole shareholder, such as @Haroon, is taxed on the net profit of the corporation (aka ordinary business income on Line 1 of Schedule K-1 (1120-S). Any salary taken by the shareholder serves to reduce that net profit. 

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If the shareholder (owner) materially participates (and is not a passive investor) they must take a salary.  I did not mean to indicate that a distribution could only be taken after paying a salary, although from a practical point of view, the amount of distribution that can be taken isn't really knowable until you take the salary into account when determining profit.  Whether the distribution is physically paid before, after or at the same time as the salary is unimportant. 

[Rick19744]

A few comments:

• The initial year of an S corporation can be a learning process
• An S corporation should be paying a shareholder / employee a reasonable salary.  The key here is "reasonable"; which is always a facts and circumstances situation.  There is no bright line test.
• By not paying yourself a salary for 2021 and taking a significant distribution, you will have exposure.  This is a hot issue for the IRS and understand that your return could possibly trigger an internal review leading to an actual IRS audit.
• If audited, there is a more likely than not position that the IRS will recharacterize some of the distribution as a wage.  This will lead to late payroll tax return filings, penalties for late filing, change to your 1040 and additional tax due the IRS.
• As noted by @tagteam currently your distribution is just that; a distribution.  Since it appears that you have positive tax basis in your S corporation, this distribution is not taxable.
• I strongly recommend you consult with a tax professional to get an understanding of what would be considered a reasonable salary for your business.  Being a sole shareholder, and I'm assuming driving the income, your wage will generally be at the higher end of "reasonable".
• We are now into the 10th month of 2022.  If you have not fixed the wage issue, you need to do it quickly.  
• I would also recommend getting a payroll service.  Some CPA's provide this service as well.  Don't procrastinate on getting this matter under control.
• https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-employees-shareholders-a...

[Critter-3]

On top of everything already stated the 1120-S was due to be filed by 3/15/2022 unless you put it on extension until 9/15/22  so now the return is late and the late filing penalty has been adding up since March.   I also highly recommend you seek local professional assistance to get educated on what needs to be done and get your books set up correctly.  

[tagteam]

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@Opus 17 wrote:
......from a practical point of view, the amount of distribution that can be taken isn't really knowable until you take the salary into account when determining profit.....

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You have an imperfect understanding of what constitutes a distribution from an S corporation. Somehow, you appear to believe a distribution is taxable to the shareholder or only can be made from net profit (e.g., after a salary is taken) and that is incorrect.

For example, if I started an S corporation in 2021, contributed $500,000 in cash, had a net profit/loss (after a salary) of $0, I could still take a distribution and that distribution would not be taxable unless it somehow exceeded $500,000.

In short, contributions to the S corporation are not taxable to the corporation and distributions are not taxable to the shareholder (unless the distribution exceeds the shareholder's basis as was mentioned by @Rick19744 ).